Saudi Arabia automotive

Saudi Arabia studies fuel subsidy reform

October 29th 2015 | Saudi Arabia | Oil and gas

Event

On October 27th, speaking at the Saudi Mining and Minerals Conference, the petroleum and mineral resources minister, Ali al‑Naimi, confirmed that the government is engaged in "studies" regarding raising domestic fuel prices and cutting the kingdom's "generous" energy subsidies.

Analysis

With no civil nuclear plants and only a minuscule amount of solar generating capacity, Saudi Arabia's domestic energy consumption currently relies almost exclusively on oil and natural gas. Its domestic energy prices are among the lowest in the world, owing to being heavily subsidised by the government—a state of affairs that has contributed to energy consumption growth rates of close to 8% a year, and surging subsidy outlays over the past decade. However, amid the mounting pressure posed by weak global oil prices, and in turn a ballooning budget deficit, the kingdom's subsidy system is becoming unsustainable.

The IMF has been pushing the six Gulf Co-operation Council (GCC) states to reduce subsidies for many years, especially on fuel. Indeed, in its latest regional outlook, the Fund warned that, if it did not take steps to reduce state spending and increase revenue, Saudi Arabia could exhaust its huge financial reserves in under five years. (However, this analysis did not include debt issuance, which would allow the government to husband its reserves for many more years.)

The UAE was the first GCC country to lift fuel subsidies, in August this year, but Bahrain, Kuwait and Oman have publicly considered such a move—Kuwait actually pared back diesel subsidies in early 2015, but soon reversed the price rises in the face of a popular backlash. Reforming the subsidy system would be similarly sensitive in Saudi Arabia, given that citizens regard subsidies as an entitlement, not a bonus. Several low-income groups depend on cheap fuel, including taxi drivers and those households that rely on liquefied petroleum gas for cooking. As a result, the process of raising domestic energy prices will probably proceed slowly and carefully, with any subsidy reductions accompanied by cash payouts for poorer Saudis.

Impact on the forecast

The comments by Mr Naimi firmly support our forecast that the government will begin to reform its fuel subsidy system from 2016, as it seeks to discourage waste and free up more oil for export. However, with no details available regarding the scale of any subsidy reform, it is too early to say whether our fiscal forecasts will be affected.